When NLG330bn (e150bn) Dutch super fund ABP posted investment returns of 10% for 1999 compared to the WM Universe average of 16.3%, tongues in the Netherlands began wagging.
The year before the fund’s integral pension schemes could opt out of the ABP umbrella, such results could only be detrimental, claimed observers. ABP has come out fighting though.
Conceding the “disappointing” aspect of 1999’s figures and the five year dip against the WM universe (ABP 12.5% - WM 14.9%), Jean Frijns, chief investment officer at ABP Investments and a member of ABP’s board of directors, points to the fact that ABP has performed consistently in equities over the same period. “Over five years we have had 2.5% outperformance in equities and 28.1% versus 25.6% in the WM figures. It is true that this year, relative to our peers, we have on the whole underperformed, although the point to firmly emphasise is that this was due to the asset mix. For example, in fixed-income we still have a strong domestic bias.”
The bond segment is high (over 50%), he notes, because of the relatively low portion (40%) that ABP currently invests in shares. In fixed income, ABP has returned 8.3% over five years against an 8.9% WM figure and in real estate the fund has posted 11.3% against 11.9%.
Frijns adds: “Our real estate investments are very international with exposure to US Reits and other listed funds, which are at a different cycle than in many other Dutch funds with a very domestic property focus.”
He concedes that a bad year’s performance has come at an awkward moment. “Also, our asset mix and underperformance this year did not help perception in the market. But we still have a reputation for being solid and slightly cautious.”
Frijns believe this summer’s policy review will go some way to redressing the investment balance.
One of the overall aims, he says, will be to up the equity exposure, which he cryptically notes could be anywhere between 40% and 80% of the fund’s portfolio. “We feel that the 40% level is too low but that an 80% level is too high, bearing in mind that we are a pension fund.
“Five years ago, we began implementing our financial targets and we have reached our set level of 40% in equities. Significantly, we believe the financial situation of the fund, at present, is stronger than we had hoped for.” He points out that ABP has a sharp reminder of risk awareness inherent in its structure, whereby the funding level cannot legally fall below 110% without impacting on contribution levels.
However, Frijns believes the current healthy solvency of the fund will provide a lever to shift investment policy, whilst maintaining the funding level. “At present, we feel that we are geared too much towards the short term. We can’t do anything about the regulatory situation, but we now have the financial strength to become more aggressive in our investment.”
At this stage, 50% of ABP’s equity exposure is in Europe (15% Netherlands), with 35% in the US, 13.5% in the ABP Pacific/Emerging markets fund and 1.5% in private equity.
And he notes that a particular focus going forward will be the high risk/return elements of the portfolio. “In high yield bond investment, for example, we have a roughly 50/50 split between the US and Europe at the moment. We believe that this will gradually shift towards more European exposure, but that our experience in the US will mean we are at the head of the European push.”
ABP’s private equity stance has already been outlined in the joint venture with PGGM and the formation of NIB Capital Private Equity. “Five billion guilders is the original figure we will be looking to put into these investments and NLG11bn is the projected figure we believe could go in when we extrapolate the figures we are using.”
Private equity investment, he says, will be carried out directly in the Benelux countries with a mixed approach using some funds in the rest of Europe and a solely funds-based approach in the US and Asia.
He explains that the joint venture gives the two Dutch funds highly capitalised leverage capabilities to create a competitive entity: “The focus has to be on the pension funds’ needs and we really wanted to suit ourselves in the investments we make here.
“There was certainly a competitive element involved. This is an issue that ABP has been faced with before, which is why we moved our front office provision to Amsterdam. There is no question that issues such as competitive salaries were a factor.”
However, he points out that the NIB Capital operation will be run at arms length from the two funds. Nevertheless, on the issue of third party management – a question that has been put to ABP for some years now, Frijns concedes that the venture will provide another string to their bow: “NIB will be actively marketing itself to other pension funds in a few year’s time.”
Consequently, the in-house investment capability ABP has been steadily building over the years – only 25% of the fund is externally managed today, looks set to continue – albeit with a qualification, says Frijns. “I can’t say we’ll never go fully in-house but it is unlikely at present. “What we are doing is transferring actively managed equities in-house but retaining some managers in Europe and emerging markets. Fixed-income will all be managed in-house. But of course NIB will be treated as an external arm, so in fact there will be more external investment.
He notes the fund is ‘very happy’ at present with its index investment.
Asked whether issues such as asset pooling between ABP and PGGM could enter into the equation, he replies: “There is a certain business logic to the question. It is an issue that has been discussed in the past.”
However, Jaap Maassen, managing director of ABP Pensions answers the question succinctly: “The cultures of the two funds are too independent for it to happen.”